Legally Blind

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CFOs are leaving no stone unturned these days when it comes to saving money. In fact, many finance chiefs are systematic about asking vendors for discounts and better terms. That process, however, begets the need to know exactly how much a company is spending on a given product or service, knowledge that some say is severely lacking, especially when it comes to legal bills from outside law firms.

“Lawyers very rarely give a good description of what they did — you find things like ‘reviewed deposition transcript’ or ‘worked on file,’ and then at the bottom, they say ‘8 hours,'” says Stephen French, managing partner of Legalbill, a firm that monitors outside legal spending for companies. “Even if [the descriptions] are accurate, how do I know how long each task took?”

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Companies such as Legalbill, Legal Cost Control, Tecum, and others make it their business to act as a middleman between companies and their legal bills from outside counsel. In general, they take the bills, reformat them, and then probe the invoices for everything from hazy descriptions of how time was spent to outright errors, such as double-billing for the same item. Most of these service firms will also act as consultants, helping companies establish guidelines for their law firms as well as estimating what various projects or options should cost.

While few companies currently use such services, the business of scrutinizing a company’s legal bill has been around since the early 1990s. Still, only about 15% of all legal bills go through a third-party, estimates Michael Rynowecer, president of legal-industry research firm BTI Consulting Group. But the recession is driving more companies to consider the idea.

French says his business is up 40% in the past year, in part due to a surge in demand in Europe, and despite a decline in overall legal spending. Indeed, BTI reports that corporate legal spending among the Fortune 1,000 dropped nearly 7% in the first three months of 2009, with those companies cutting the number of outside law firms they hire from 42 to 35, on average.

Rollins Inc., a New York Stock Exchange–traded company that owns a portfolio of pest-control companies including Orkin, has been a client of LegalBill since 2001. General counsel Kathleen Mayton says she became interested in the service when she realized that her legal team was spending too much time reviewing legal bills.

“Like many companies, Rollins uses outside counsel guidelines as to how we’ll be billed,” says Mayton, “but law firms have varying billing cycles and various billing formats, and that makes it tough for in-house counsel to accurately monitor and track whether they’re complying with the guidelines.”

Mayton declines to say how much time or money the service has saved Rollins. “The amount that’s adjusted from the bills is not the way we measure the program,” she says. “This just gives us some assurance that our firms are complying with guidelines; the perfect situation would be to have every firm billing in compliance.”

In general, though, French says the net savings are generally 8% to 10% in the first two years, and 5% thereafter, as law firms take more pains to focus on billing efforts. “A lot of the savings come from law firms changing their practices when they realize the customer is doing their due diligence,” agrees Rosemary Patricelli, general counsel at Legal Cost Control, where savings rates are broadly the same. Both firms charge a percentage of fees reviewed, generally in the 1%-to-3.5% range.

Getting more clarity on otherwise-enigmatic bills is an attractive proposition to CFOs, who often lead the charge in hiring such firms. However, many in-house attorneys are not on board. “Some of the savings are reported to be substantial, but by and large what we hear from the general counsels is: ‘If I have that much distrust of the firm, I probably don’t want to work with them,'” says Rynowecer. Susan Hackett, general counsel for the Association of Corporate Counsel, agrees. “I look at these firms as kind of like the nanny cam — if you think you need one, it’s probably already too late,” she says.

Much better, says Hackett, is to set a budget ahead of time with a law firm, essentially capping the spending before the work begins. While that’s still unconventional and sometimes awkward, she says more companies are “going to law firms and saying, ‘This is what it’s worth, it’s up to you to manage to that number.'” Those figures may also include some type of bonus for favorable outcomes such as getting the work done early or avoiding a court battle. For more-nebulous projects, she says, companies might try a phased approach, setting a price for the first, known phase, with an agreement to negotiate the rest as the work is better defined.

Such alternative fee arrangements are growing in popularity these days. “The flat rate adds certainty, and that immediately reduces risk and adds savings because I don’t have to monitor it as well,” says Rynowecer. Naturally, the companies that provide legal-auditing services say clients end up overpaying that way, since they don’t have enough data to know what a fair fixed cost would be. “We have never seen a situation that would be better for the client than us managing hourly fees,” declares French.

Whichever side of the debate a company comes down on, though, Rynowecer says the debate itself is unlikely to persist, assuming an economic recovery takes hold. Alternative fee arrangements “probably have about a two-year life,” he says, “before law firms try to go back to business as usual.”